Pricing variance swaps in a hybrid model of stochastic volatility and interest rate with regime-switching

Jiling Cao, Teh Raihana Nazirah Roslan and Wenjun Zhang

Papers from arXiv.org

Abstract: In this paper, we consider the problem of pricing discretely-sampled variance swaps based on a hybrid model of stochastic volatility and stochastic interest rate with regime-switching. Our modelling framework extends the Heston stochastic volatility model by including the CIR stochastic interest rate and model parameters that switch according to a continuous-time observable Markov chain process. A semi-closed form pricing formula for variance swaps is derived. The pricing formula is assessed through numerical implementations, and the impact of including regime-switching on pricing variance swaps is also discussed.

Date: 2016-03
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http://arxiv.org/pdf/1603.08289 Latest version (application/pdf)

Related works:
Journal Article: Pricing Variance Swaps in a Hybrid Model of Stochastic Volatility and Interest Rate with Regime-Switching (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1603.08289

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